UOB - OCBC Investment 2018-03-05: Outlook Is Positive In 2018

UOB - Outlook Is Positive In 2018

Rates are heading higher.

Declared FY17 DPS of S$1.

Upping UOB's fair value to S$30.86.

4 hikes expected this year

With the new US Federal Reserve Chairman Jerome Powell’s latest comment, most economists are now expecting four Fed hikes in 2018. In addition, he expects the next two years to be good for the economy, very much in line with current consensus views that fundamentally, global growth is still intact and fairly positive for the next 1-2 years.

Based on the latest International Monetary Fund’s projection (Jan 2018), global growth is estimated at 3.7% in 2017, with the momentum continuing into 2018 at 3.9% and 2019 at 3.9% as well.

We believe this will continue to be constructive for Singapore’s banking sector.

UOB’s 4Q was in line with our expectations

Recently, UOB posted 4Q17 net earnings of S$855m (+16% y-o-y and -3% q-o-q), giving full year earnings of S$3390m, which was in line with our expectation of S$3382m.

For the full year, Net Interest Income grew 11%, while Non-interest Income grew 8%. Cost-to-income came off marginally, while allowances moved up as expected. Net Interest Margin (NIM) improved from 1.69% in 4Q16 and 1.79% in 3Q17 to 1.81% in 4Q17 – in line with the other two banks. It declared a total dividend of S$1.00 versus 70 cents the previous year.

Overall, we deemed it a good set of results.

Revising FY18 earnings and fair value to S$30.86

With the favourable operating conditions, we have revised up our FY18 earnings forecast from S$3791m to S$3841m. This is a 13% improvement over 2017. We believe this is achievable on the back of better Net Interest Income and Net Trading Income expected for 2018.

In addition, we believe that a S$1 dividend payout is also likely in FY18, which works out to a payout ratio of about 43% (versus 49% in FY17).

UOB's share price has done well so far this year – up 6% YTD. After adjusting our estimates, and using the same valuation of 1.3x FY18 book, our fair value estimate moves up from S$30.10 to S$30.86.

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